Too Many Non-Profits?

Not long ago the head of a small family foundation said to me, “Why are there so many organizations involved in arts and culture? You should join forces with other nonprofits, instead of each of you coming to us for grants.”

That basic question is asked often, and not just about culture and the arts. A variant is, “Do there really need to be so many Jewish nonprofits in Southern California?” Nowadays, in the current economic climate, the same question has been reframed as a proposal to reduce the numbers through mergers. It’s just another way of saying that the community would be better off with fewer separate organizations.

Where does this come from? Partly, there’s a common prejudice against overhead expenses, a belief that funds directed to projects are inherently being put to better use than money that pays for management. So, the reasoning goes, combining organizations will result in less management, leaving more money for programming. The problem is that each of those notions is a bias, not a thoughtful or strategic approach to budgeting.

Supporting unglamorous services like bookkeeping may not give a donor a warm feeling, but the alternative is not to account for how money is spent. Fund-raising activities give nonprofits the means to carry out their missions, but there’s often an unspoken feeling that asking for money is self-interested rather than a means to carry out a mission. And paying a CEO, a red-flag issue in the for-profit world as well as among nonprofits, seems vaguely unsavory to some, as if performing a public service should be its own reward. Yet all these functions are essential, and their cost is roughly proportional to program expenses whatever the number of organizations involved.

There’s also the peculiar idea that two can live as cheaply as one. In households that’s true only if each person eats half as much as before. And in nonprofits that works if members or constituents receive only half the services they used to; otherwise the cost savings are minor and largely symbolic. It’s appealing to think that bringing two synagogues or charities under the same roof will stretch their dollars, but symbolic savings aren’t very helpful in balancing a budget.

There are two other dubious premises behind the bias towards fewer organizations. One comes from the mindset of central planning, where people in power allocate resources on behalf of an entire community. In that view there is a “right” number of institutions, the people in charge set that number, and having too many institutions is inherently wasteful. But ours are decentralized communities where the number of institutions is set by the demand for their services. There are too many nonprofits only to the extent that their services go unused, like having too many school lunches. Cutting down on the number of institutions may subjectively feel prudent, but that doesn’t mean it’s better for the public.

Finally, confusion can come from the feeling that there are simply too many options. One might as well say that there are too many kinds of shampoo in the drugstore aisle, or too many Starbucks downtown. Too many for whom? In the case of grant proposals, it’s too many for the donors. Some, like the philanthropist who objected to “each of you coming to us for grants,” want to simplify their work by having fewer applicants to deal with. But the cost of that personal convenience is to reduce the range, depth, variety, and imagination in the public services available to the community.

For our nonprofit sector to perform at its peak, we have to make smart decisions grounded in fact. Slogans about cutting costs and biases about budget items are no substitute for a strategic planning. Our communities will benefit most if we focus on how best to serve them, not on whether we need more or fewer institutions to do it.

Bob Goldfarb, a longtime executive and consultant and a Harvard MBA, is president of the Center for Jewish Culture and Creativity. Bob is a regular contributor to eJewishPhilanthropy.

Comments

Right on as usual. Jumpstart advisor (and Third Sector New England Executive Director) Jonathan Spack also attacked this quite well recently (http://twurl.nl/7n2qqh) and then offered some free advice for the funders who think there are too many NPOs.

One other important reason why fewer isn’t automatically better is the nature of nonprofit leadership, particularly in the innovation ecosystem. New NPOs are frequently led by charismatic and unique leaders. Even orgs with seemingly similar or overlapping missions may have dramatically different approaches and constituencies, and may even support each other’s success (coopitition, anyone?). Not only is more better in this case (as in more choices, strength through competition), but mergers that force two visionary leaders with different styles and personalities to co-lead a single organization are just not workable.

Pundits who are constantly advocating for mergers and reductions in the numbers of organizations might want to realize that there is already a mechanism in place to deal with this issue. It’s called the market.

The author states: “…Yet all these functions are essential, and their cost is roughly proportional to program expenses whatever the number of organizations involved…” This is incorrect; larger nonprofits spend a smaller portion of revenues on overhead than smaller nonprofits – and based upon my research larger nonprofits spend about twice as much per dollar of revenue on overhead as competing for-profits.

Joshua’s reference to the “market” in his last sentence is completely mistaken. There is no market for corporate control in the nonprofit world, primarily because there are no “owners” who would benefit from derive a benefit from a change in control, only executives whose jobs would be at risk. The premise of the nonprofit form seems to be that governance will effectively mediate the conflicting interests of the public and management – but that doesn’t work in the real world and the dearth of nonprofit mergers
is the best evidence of this fact.

I am being educated by the previous comments. Thanks. Kevin’s remarks most resonate with me, as my company and I seek to serve nonprofits, which is our mission.

I think that the answer to the question of Why so many? is that human beings start and run NPOs, just as they do the shampoo makers referred to in the earlier post. As founders and managers, we bring our own selfish interests and biases to work every day. We all want to have the best-selling shampoo. Self-interest too often drive us, in for-profits and in NPOs.

The chairman of a large foundation told me the other day that he subscribes to the notion that “Nothing’s impossible if it doesn’t matter who gets the credit.” Then he added, “All too much interest is shown by NPOs in ‘getting the credit.’ This lessens all chances for meaningful cooperation, creative collaborations, and beneficial mergers.” And it contributes to our having 1.8 million NPOs nationally.

I live in a major city –Houston, fourth largest in the U.S. We are also arguably the most generous city in the nation. But…I see a quarter of our population living at or below the poverty level. Only Detroit has more embarrassing statistics. What’s up here? Where are our 19,000 NPOs when people need help. Need hope.

Instead of focusing on the number and variety of NPOs, maybe we ought to measure our effectiveness in eliminating hunger, ignorance, wars, death by disease, oppression and genocide. Just a thought.

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